”He went like the one that hath been stunned, And is of sense forlorn; A
sadder and wiser man, He rose the morrow morn.”

So ends Coleridge’s tale of the lost Ancient Mariner. Might those lines
apply to the political and macro economic events of the last week? One can
be excused for being stunned at how quickly events can turn. As for being
wiser, well, Man ought not to be tethered as his only teacher to the school
of example, and therefore he should be able to recognize that it was all too
foreseeable. So much for being wiser! For now it would seem that we are
simply left forlorn and sadder on the morn. If we are also lost like that
ancient mariner, perhaps it is because the the causes and reasons for our
macro economic problems are now so manifold and falsely claimed to be
obscure. Let Europe go down and we may go down, an article of faith that can
perhaps be counted on today.

Brexit, while an important event, for it set in motion issues that might
have lain quiescent for a while longer, yet a far more important event has
now arisen in Europe. A number of countries using the Euro have openly
declared that Great Britain was one of the sane and reassuring member in the
EU, because it always had the correct vision of what the EU must be, or it
cannot survive. The notion of the European Union (EU) becoming a United
States of Europe was always a delusion; the EU was founded as a free trade
area composed of sovereign nation states, and was justified as economically
useful and viable, and the institution itself is also a persuasive guarantor
of inter European peace. That assessment remains in stark contrast to the
competing vision of the EU and of the Eurocrats, inspired by the thinking
and dreams of Jean Monet, the first head of Euratom in 1957. It is worth
recalling that it all began with the basic notion that if the conducting of
modern total warfare could be made impossible for lack of coal and steel,
then NEVER AGAIN would Europe have to endure the horrors of a World War II;
indeed it could be argued that the idea originally took shape as a result of
the indefensible slaughter at the Battle of the Somme in 1916, or as the
French would have it, their later costly success at Verdun. Any action
including any deceit or anti democratic step taken to prevent a resurrection
of the cry of NEVER AGAIN is justified according to this vision of Europe,
and the surest way of achieving that goal is a combination of advocacy and
deceit to gradually eliminate the principal sovereign nation states of
Europe by merging them into a new Unitary European Super State, which would
confer the added benefit of becoming the super state of the World. Which of
the two visions of Europe will prevail is now the principal drama to be
resolved. On the one side are Poland, Denmark, the UK (assuming Brexit is
not finalized), Hungary, Slovakia, Czech Republic, Austria and others who
support the free trade area version, and on the other side apart from the
seemingly vengeful Eurocrats in Brussels, who else? Well as to those “who
else”, that depends on many different things!

At this point it is appropriate to recognize that the fate of the Euro
common currency also gets mixed up with the more fundamental issue of which
version of Europe should prevail, the free trade area version or the
currently “official” central state version preached by the Eurocrats. Based
on the experience so far concerning the southern tier of Europe, it is
undeniable that the common currency has, on balance, been destructive.
Greece so far is the poster child. It desperately needs control of its own
to be a much cheaper currency and accompanying monetary policy just to have
a viable national economy left and to permit it to compete. On the other
hand Germany greatly benefits from the common currency because it greatly
facilitates their vital export machine to the rest of Europe with which it
shares the Euro. But what if that currency, and specifically the monetary
policy which dictates its characteristics, is now based on sheer economic
LUNACY, then it follows that sooner or later the currency itself becomes
bad, because for any good currency to remain so, it must exude confidence
and to do so it must be a storehouse of value – at the very least for some
reasonable period of time! Otherwise the begetting of hyper inflation
becomes inevitable, and that must be avoided at all costs. By definition a
currency that does not hold its value for some reasonable length of time is
unreliable and soon enough becomes a bad currency. Insufficient emphasis is
paid to the serious consequences that follows in the wake of bad currencies,
hence the present emphasis on destructive monetary policies that in turn
engender bad currencies. While prudent monetary policies are a part of of
economic prosperity and wellbeing, it is ABSOLUTELY VITAL in turn that it
also must rest upon sound fiscal policies of the sovereign nation state (or
nation states like the EU) or the whole exercise becomes nonsense. This
essential point that cannot be emphasized enough!

Essentially we now find the EU in a very bad fix because of totally
irresponsible fiscal policies brought about by ignorant and rapacious
politicians spurred on by foolish electorates, which in turn begat what now
amounts to monstrous destructive debts and the monetary policies to deflect
and disguise the bad effects of those debts. If we are honest, which most of
the time we most decidedly seek not to be, that fundamental fact is also
present as the unspoken chief issue present, and in a sense overshadows the
proceedings and issues to be resolved about what kind of Europa will emerge.
Right here it should be noted that Germany and its own Central bank, the
Bundesbank, and the majority of German politicians understand these truths
only too well from their forefathers. For the sake of their dominant export
machine which represents a very large portion of their economy (50% of their
GDP) they too are now linked to a bad currency, and events dictates that
something must be done to change that situation. The dilemma for the Germans
is to reconcile the efficacy of a common currency to encourage the health of
their vital export machine with the inherent weakness of an unhealthy Euro
shared with the non competitive economies of the other Euro state members.
The suffocating accumulated debts now owed by the noncompetitive Euro states
are quite simply way too big in relation to the size of the German economy
to be mutualized among the EU member states let alone to be guaranteed by
Germany. That in turn begs the question whether it is even possible for
Germany to share a common currency with their non competitive neighbors.
That fundamental question will also have to be addressed quite soon; yet
another problem!

Indeed there are many misguided economists clinging to the insane monetary
policies that now come with a great many currencies, including their common
currency, the Euro, and these folks still insist, or more likely use that
argument as an excuse, on proclaiming that the non existent dragon of
deflation must first of all be slain (which calls for more and more
destructive negative interest rates, and more and more printing of
electronic “money”, which is deceitfully labeled as some innocent kind of
Quantative Easing (QE), something heretofore never heard of, including a
further endless manipulation thereof, and therein lies the tale of
destructive monetary policies insisted upon by the theories of the modern
day neo Keynesians and their so called school of thought which unfortunately
holds sway over the world of Central Banks.

The spark of serious change in Europe was lit on June 30/16 by the Czech
foreign minister after a meeting of the Visegrad group of foreign ministers
and the foreign ministers of France and Germany. They demanded the ouster of
Jean-Claude Junker (head of the EU executive) for having caused Brexit. The
UK referendum on June 23/16 decided upon Brexit of course, and not poor
Jean-Claude, of whom it is widely reported that apart from being the most
senior, faithful and loyal Eurocrat, he also has the very good sense to
begin his day with very solid doses of cognac so that by lunch he is often
incoherent. So we now have out in the open, a fundamental dispute about what
the EU really should be, and whether the common currency is sound, and
specifically whether the monetary policy driving the Euro, and the dictates
of the European Central Bank (ECB) in aid thereof can possibly be
justified; at the very least in the thinking of sane people, and by the same
token the resulting sad condition of a great many important European
commercial and merchant banks.

Were that not enough, one might turn to a brief glance of Articles 49 and 50
of the Lisbon Treaty which governs the admittance and exits of members of
the EU itself. Article 50 for example instructs that the governing laws of
the exiting member shall be the guide of the process on the one hand, yet on
the other hand posits that such exit shall be conducted in accordance with
the dictates (“Laws”) of the European Council, an unaccountable and an
unelected body the composition of which is fluid because its membership is
expandable. Article 49 governing the admission of new members into the EU is
perhaps a little better defined. Can one be forgiven in suspecting a
resulting circus in the making, a total mess in the execution thereof ab
initio, and sympathy for those unfortunate souls having to deal with the
gravitas of such matters. Are they not also to be forgiven in partaking
solid doses of cognac at breakfast in imitation of our hapless Jean-Claude
who will no doubt be enmeshed in the process himself. In other words, good
luck with the exit/Brexit/Article 50/ process! Finally it should be
acknowledged in fairness that there have been very recent rumblings and
equivocal statements by some senior EU leaders that the time may have come
to be more flexible as to what a future Europe should look like, something
like an official acceptance of what each country thinks that Europe should
become; for what that’s worth.

But once more, wait again! We are far from finished about a determination of
the greater Europe vision, because at this moment there remains the pressing
matter of the pitiful state of the Italian commercial banks (and Spanish
banks for that matter). If 10% of non performing bank loans held by a bank
is recognized as indicating such bank to be insolvent, then what about 20%
of non performing loans owned by the Italian banks which Prime Minister
Rentzi urgently has to contend with. That 20% amounts to a astounding 25% of
the Italian economy or GDP. No way is Italy permitted to prop up their banks
with state funds according to the dictates of the ECB and the Germans, but
without doing it (for no capital infusions for the insolvent banks are
available elsewhere), the whole Italian economy effectively collapses. So he
is going to try and do it anyway, and by the way how can he resist in
pointing to the still operating German Deutsche Bank, of central importance
to international trade, which itself is insolvent to the chagrin of its
stockholders, which also is sitting on top of $56 Trillion of credit default
swaps (concerning their guarantee of mortgages) as well as their share of
derivatives amounting to more than $1.4 Quadrillion, many of which
derivatives are interlinked in mysterious ways and which of their own could
easily bring the whole interrelated world banking and economic system
crashing down on our ears. Clearly something has to change drastically
concerning the Italian banking crisis, and yes we can probably count on it
happening because it simply must. In passing it is perhaps of interest to
note that not only are the stockholders of these Italian banks adversely
affected but so are their innocent depositors because by law and regulation
of “bank bail ins“ which is in full effect just about everywhere in the
western world, bank depositors shall contribute to the failure of their bank
to the tune of between 10 to 90 percent of their own deposits in such banks.
But it is only right to give the “bankers” due justice that some of the
fleeced depositors may be offered relief in the likes of 10 year “co-co
bonds” such as presently is proffered by European banks where an “investor”
is offered unheard of 6% interest on deposits, but only on the condition
that the bank makes any money in accordance with its unique judgment of its
own financial condition; and that is never going to happen. Little wonder
that Italian depositors are fleeing their own banks. As a quick aside,
anyone just about anywhere counting to be made whole again by government
backed insurance deposit schemes are living in a fools paradise when things
start to get really serious.

Now that ought surely to end any more painful considerations, but the genius
Central Bankers have plenty more in store, their imaginations are unlimited.
Somewhere they forgot Einstein's warning that those who set themselves up as
the judges of truth and knowledge (and especially in matters of monetary
policy) are shipwrecked by the laughter of the gods; would only that the
gods had laughed much sooner! Any set of fools can meet in a new
surrealistic $1.7B twin tower skyscraper in east Frankfurt around an
imposing board room table and apply algorithms as long as your arm
concocted by hundreds of PhD's to produce economic forecasts and “remedies”
that are always wrong and always destructive. What else can be expected from
the energetic and desperate application of negative interest monetary
policies (NIRP)? That this is sheer economic reckless madness run wild would
be the understatement of the century! Yet that the whole European experiment
is fatally infected with such policies is undeniable because the actual
figures support that sad conclusion. For instance, just a little measure of
that; in Switzerland you actually have to go out half a century (maturity)
just to find any Swiss government bond giving any kind of positive yield, in
fact some $12 Trillion of sovereign bonds now carry negative interest rates.
As a result your worst fears imaginable will be visited upon all pension and
insurance schemes Europe wide. The very notion that negative interest rates
will spur economic revitalization is clearly belied by the results obtained,
just go to Japan where this madness is even more energetically applied than
in the EU; let’s just say that negative rates does wonders to suppress the
velocity of money and to the system of capitalism and the free Market,
presumably the very opposite to the effect intended in the first place.

There are of course those who would still maintain that with the creation of
more new phantom capital, borrowed printed money in effect, then somehow
European leaders will pull a rabbit out of the hat, and keep the
debt/borrowing/money printing game going until a new European solution is
found. Don’t count on it! For very sure, when the debt/borrowing issue falls
on France it will be game over for the EU! But then again it may well be
that the FN (Front National) and its leader Marine le Pen will decide the
fate of the EU next year by executing their French version of Brexit.

All of the foregoing will inevitably be part of the considerations to be
resolved in determining just what form, if any, the great European project
(the EU) will take. And more contentious issues also have to be resolved,
such as the failure to mutualize the tremendous costs of the refugee crisis.
If the EU can’t afford to share (mutualize) the cost of the debt problem
(which would amount to financial suicide for the Germans) then what about
the costly refugee problem which in the eyes of many Europeans was basically
caused by an idealistic and guilt ridden post WWII Germany in the first
place.

We may justly ask just what the hell are we talking about? I didn’t do
anything foolish, I didn’t cause this unfolding European tragedy, not did my
neighbors and friends. And here begins yet another tale that very
unfortunately is only too relevant to all of us. This paragraph will be
brief and concluding, even if admittedly it ought not and cannot be
conclusive! We are, or we certainly should be talking about the cause of all
this, and the answer is to be found in our own mirrors. We are the ones who
demanded what we could not afford, we elected politicians who would provide
what we could not afford or they would not be elected, and most politicians
cannot afford not to be reelected. In turn they simply piled on the national
debts (much of which we bought ourselves) higher and higher and yet higher
to pay for economically unproductive assets that could not produce an income
stream to retire such debts before the end of the useful life of such
assets, and when that heavenly scheme eventually ran its course, the
politicians finally resorted to call upon their Mephistophelean central
bankers for magic solutions so that we could continue to satisfy our
insatiable thirst of desires which in turn resulted in ever mounting debt
and evermore imaginative monetary policies to support our irresponsibility.
The party is now soon to come to an end, for you can only have so much
misallocation of capital, you can only have so many desperate and fruitless
searches for non existing yields which invariably ends up in “investment”
bubbles and their costly bursting, before the cry arises that it is all an
unbelievable fairy tale and that the Kaiser has no clothes on, followed by a
stampede to a blocked exit, which was too narrow in the first place, for
there will be insufficient liquidity left to buy whatever financial papers
are offered. And those left with fiat paper money will find that such money
only amounts to a call upon a bank for a corresponding credit upon a bank
that already is insolvent, for it too is build upon a foundation of printed
money and worthless debt. That is the reason for the advocacy of gold which
in turn is proclaimed to be money. But is it really money in a modern
economy as we have today; perhaps, but can you pay for the groceries with
it, can you settle your mortgage with it, can you pay your taxes with it?
For a sense of orderliness and to dispose of the remaining financial issue;
what about all those lovely sovereign bonds? They would make lovely
wallpaper in some financial museum as a reminder that they never could be
paid, but the trouble is they are just electronically recorded as if they
never existed anyway. Remember that earned money, that is money derived from
savings earned from productive assets, is very very different conjured up
the electronic money based on borrowings from non existing assets which
precisely has been the sin of the EU.

Democracy and civilized behavior rests in the scale, because the inevitable
result from the situation is truly going to become that serious! Despite
everything, can they still pull it off in Europe? One has to be an optimist
to suppose that it can be done before the mother of all financial crashes
occur. After that can a better and brighter Europe emerge? That must awaits
answers from succeeding generations. Will we at least have the consolation
to proclaim that we have learned something new and valuable, some basic
macro economic lessons that we didn’t know before? I very much doubt it,
because these lessons were already learned well before our times.